The RBZ governor is due to release the monetary policy and the policy position is highly anticipated against the sustained monetary related macro-economic deficiencies. As a symptom, the economy has endured southward gravitation of the exchange rate and a sharp loss of value through inflation. Prices of most basics have risen by over 200% since September 2018 and the parallel market has discounted RTGS and bond notes by 75% over the past 24 months with most of the value having been shed over the last 3 months. Broadly, the market continue to be starved of hard currency as well as local money in notes for day to day transactions. These challenges are deep rooted in a weak fiscus and to a lesser extend the abdication of monetary policy flexibility in a dollarized economy.
The government believes challenges being encountered on the monetary front are a derivation from fiscal imbalances that has resulted in excessive local borrowing among other factors. While the prognosis is widely shared by pundits, there is a clear disagreement in terms of what remedies should be adopted to end the crisis. In his 2019 budget, the Minister of Finance introduced austerity measures to cut back on government spend (as a percentage of income) and increased taxation to spur government revenue. Over the last 2 months of 2018, government went on to record firmer revenue numbers ahead of target based on a higher taxation and a surge in inflation which shows mixed signals in terms of policy measures effectiveness.
Why has local money continued to lose value against the USD if austerity is expected to yield improve and stabilize the fiscus or is it too early to determine. Indeed local money has been on a sustained downward spiral although the rate of decline has moderated since December. Part of the reason why exchange rates have stabilized was because of a sharp slowdown in money supply growth rate. In fact in October, for the first time since January 2018, money supply actually came off which is a negative growth. This decline meant government did not inject more money into the economy through treasury bills issuance and that it lived within its means which is commendable. However as is the case in most analysis there is a lack of appreciation of costs attached to undertaking certain policy measures.
The October improvement on the fiscus did not represent any firming fundamentals, in-fact it was mainly an impact of inflationary growth and speculative buying of goods at higher prices. With prices doubling so did VAT on sales among other taxes as shown in ZIMRA’s full year numbers. This revenue boost cushioned government’s spend which did not necessarily come off. The downside of such a revenue boost is that real income is eroded. Measures such as the 2% tax have had a similar impact of raising tax revenue while exerting a premium on notes notably hard currency. Although industry production was generally up in 2018, the extend of income growth was partly a consequence of firming prices, which is distortive.
Local money has continued to lose value because the net position on most fundamentals remain weak if not worse-off. The mop up of excess liquidity has been too minute and thus less effective so far. At the going rate of money supply slowdown, no significant slowdown in exchange rate worsening can be expected. Likewise, most indications are pointing towards a weaker industry performance in 2019 due to forex shortages and a slowdown in aggregate demand as incomes lose value. The net balance of payments largely derived from the trade balance is worsening. Exporters have shown a disapproval of the current retention rate and this has dampened production and export receipts, a trend likely to deepen in 2019 if the currency matter is unresolved. From this, it is apparent that the fiscus leg in isolation does not have the power to solve the economic crisis neither does it effectively solve the monetary crisis.
There is need to urgently address the economic monetary front to salvage forex receipts, demand and production lest the economy fall into a depression, since a recession is now most likely in 2019. Austerity globally has however never succeeded in isolation of a flexible and weaker monetary regime. If pursued in isolation, as shown earlier, austerity will result in inflationary growth and mid-term overshoot in spend relative to income. Whereas government is slowly coming to this realization, the hanging question is if government was to intervene, through the expected monetary policy, what form of intervention is best suited for the economy.
There is a high likelihood that through the monetary policy, government will reintroduce the Zim dollar and do away with the multicurrency regime. This projection is based on recent utterances by the Minister of Finance, who said the USD is unsustainable and that Zimbabwe should expect a new currency in 12 months a date he later revised downwards 3 days ago. Similar sentiments were, during the election campaign period, shared by the Vice President who hinted on a pending Zimdollar return. Then Deputy Finance minister Mukupe shared same sentiments in one of his Twitter posts. And barely 24 hours ago, the Minister of Mines while presenting at the ongoing Mining Indaba in South Africa, said the monetary policy due to be released will tackle currency issues.
The above is overwhelming evidence of the policy direction the government is due to take regards the currency. The evident sharp economic losses currently being experienced may have prompted a sooner than anticipated response. What form or a de-dollarisation can we expect outright or partial. The government is prepared and adamant to reintroduce an exclusive local currency and do away completely with the multicurrency. There is expectation however that the government will avoid a hard landing and that this currency will be managed but not at par to USD and have a semblance of market forces to improve allocation efficiencies. A hard landing involves a currency introduction without controls, a pure float where the government allows market forces to determine the value of local currency. Given the macro economic instability, low confidence and negative perception prevailing in the economy it is likely that if this route is followed the currency will immediately crush. Zimbabwe likewise does not have the forex reserves or gold to cushion vitality that may arise from currency battering. If let to be, significant value created over the last 10 years will be completely wiped notably pensions and corporate balance sheets, many companies will fold on insolvency. There are no indications that government will prefer this route.
A managed but weaker exchange will to some extend help improve forex availability and circulation as well as inspire production growth. On the other hand, it will shave value in the very short term, but relatively less from pensions, savings and corporates alike. This partial loss is however inevitable if the economy is to retrek the recovery path and can be compensated for in the mid-term. In 2015, facing a similar currency crisis, Nigeria’s CBN introduced a tiered fixed -managed exchange rate which remains unpopular but effective. However threats in terms of corrupt government officials with access to the subsidized forex remains given the high levels of corruption in Zimbabwe. Venezuela which is in a deeper economic crisis, suffered from similar corrupt activities at the Central Bank and the system has collapsed.
The above represent the options at RBZ’s disposal, with the latter being the most preferable choice. It is given that the cost of a hard landing is catastrophic to the economy although a gradual target towards forex market liberalization should be fostered as fundamentals improve. The managed weaker exchange could deter new foreign money, but will allow for gradual clearance of outstanding foreign dues. It will also cushion the economy from a fallback given the expected slide in production on maintaining the status quo. Austerity is also better pursued with a weaker currency to allow for increased foreign demand of local produce. This foreign demand will compensate for the loss in local demand due to rising taxes and expenditure cutback. A weaker currency will also help improve the economy’s forex generation through export receipts thus gradually correcting the BOP position. The option of re-dollarisation would have been most desired, but the opportunity seems to have passed, as government presently lacks the goodwill nor the substance to pull capital through a international bond or bailout, which could have been structured to ring fence the huge electronic balances in Zim’s financial system.
Equity Axis Research